The dollar remains close to the highs of the year as recessionary fears fail to dent the assumption that inflation is a problem and that the Federal Reserve is laser-focused on taking rates higher to address it. That seemed to be the central message coming from the European Central Bank's Sintra panel in Portugal, where central bank governors effectively concluded that the low inflation regime was a thing of the past. The current narrative means that the Fed is prepared to power ahead with tightening - even in the face of slower activity data and equity weakness - until it is confident that inflation is under control. On that subject, today sees the May US PCE inflation data, any upside surprise could nudge the dollar and US rates a little firmer.
After increasing by an average of 0.8 percent in February and March, it is anticipated that Canada's GDP will contract in April. Additionally, Canada shed full-time jobs in April for the first time since last June (31.6k), but the data is too old to be of much use. On July 13, the Bank of Canada will meet. With an anticipated year-end rate in Canada of about 3.5 percent, the market is more certain that the Bank of Canada will increase rates by 75 basis points next month. The loonie is suffering as a result of the attempt to reduce risk. It is currently trading at 4-day lows. The USD/CAD recovered from a two-and-a-half week low of 1.2820 on Tuesday, and it is currently trading over 1.29.
The ECB's euro trade-weighted index is languishing at barely 1% off the lows of the year. Clearly the ECB will face much greater challenges in lifting policy rates than the Fed and that seems to be the doubt in the market. Tension from the war in Ukraine and now NATO's expansion makes for a very difficult investment environment. EUR/USD seems to have sunk into a new 1.0400-1.0600 trading range and it feels that if the ECB were to start briefing on the chances of a 50bp hike in July, the euro would not get much of a lift anyway.
The UK has just released a £51bn current account deficit for 1Q22. That may be a function of reopening/lockdown sequencing between the UK and trading partners - but it is not a good look. The Bank of England (BoE) is going to have to stay pretty hawkish - or at least not protest against current market pricing - if it wants to keep sterling supported. GBP/USD to stay vulnerable. Under 1.2100/2115 could see the 1.1950 low retested.